Australians may be facing a cost-of-living crunch but that hasn’t stopped us tucking away savings at record rates. But are you making the most of your savings? Could you be better off parking spare cash in an offset account linked to your home loan rather than a separate savings account? We crunch the numbers to find out.

Despite high inflation and a string of rate hikes, figures from banking watchdog APRA show household deposits hit a record high of almost $1.42 trillion in September[1].

Part of the appeal of growing savings is the opportunity to earn a decent interest rate after years of low returns on deposit accounts.

But if you have a home loan, you’ll get a lot more bang for your buck holding spare cash in an offset account linked to your home loan.

An offset account works like a regular transaction account linked to your mortgage. The big difference is that instead of earning interest on the balance, the value of the offset account is deducted from (or ‘offset’ against) your home loan when monthly interest charges are calculated. 

By reducing the balance on which interest is based, the loan interest charge is reduced. Your monthly payment remains the same, meaning more of each repayment goes towards paying off the loan principal. In this way, stashing spare cash in an offset account helps you pay down the loan sooner.

How an offset can see you save

An example will show how an offset works.

Let’s say Trish has a home loan for $500,000. She pays the average standard variable rate of 6.95%[2]. Trish also has $20,000 in savings.

Option 1 – Trish holds her savings in a separate savings account.

Trish deposits her $20,000 savings into an account paying one of the highest base rates of 4.90%[3].

In the space of a year, Trish could earn $980 on her savings. The catch is that interest earnings are fully taxable. If Trish is a high income earner, she could lose almost half her interest earnings to tax.

On the other side of the ledger, in that same year Trish would pay approximately $34,750 in home loan interest.

Option 2 – Trish holds her $20,000 in an offset account

By using an offset account, Trish does not earn any interest on her savings.

Instead, the monthly interest charge on Trish’s home loan is based on a loan balance of $480,000 ($500,000 less $20,000). In one year she would pay about $33,360 in mortgage interest.

That’s $1,390 less than the $34,750 she pays without the offset.

Remember, the most Trish could earn on a separate savings account (before tax) is $980. So, Trish is at least $410 better off in just one year ($1,390 less $980) by storing her spare cash in an offset account. As no interest is physically paid to Trish, there is no tax impact on the home loan interest savings.

The upshot is that interest rates on loans are almost always higher than rates on deposit. That is how banks make money. So, you will save more in interest charges using an offset than you would earn in interest received on a separate savings account.

Like to know more about home loan offsets? Call the team at Our Broker on 1800 913 677.

[1]https://www.apra.gov.au/monthly-authorised-deposit-taking-institution-statistics

[2] https://www.canstar.com.au/home-loans/average-interest-rates-home-loans/

[3] https://www.canstar.com.au/savings-accounts/best-savings-account-interest-rates/